NEW$ & VIEW$ (6 SEPTEMBER 2013)

ISM Services Index Hits Highest Level Since 2005!

Combining today’s reading in the ISM Services with the ISM Manufacturing report earlier this month and weighting each indicator according to its weight in the overall economy, the overall reading of the ISM Manufacturing and ISM Services index came in at a level of 58.3.  This was tied for the highest reading in this indicator since November 2005.

(…) like the Manufacturing index, both Business Activity and New Orders were both above 60.  The last time both of these components were above 60 in each index was back in February 2011.

Surprised smile Here’s the important chart from BMO Capital:

If history were an infallible guide, we would be calling for 4% GDP growth in Q3. It isn’t, so we’re sticking with an estimate of half this rate (2.0%) based on a few soggy indicators. That said, for the first time this year, we now see some upside risk to our growth profile. It’s a start.

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 August Retail Sales Shy of Hopes

Same-store sales—for the few companies that still report monthly results—came in slightly below expectations, which had been lowered in recent weeks thanks to a number of downbeat forecasts. (…)

Mall traffic remains weak, promotional activity is still high, and apparel retailers in particular are facing difficult comparisons following last year’s strong back-to-school season.

And given that a retailer’s performance during the back-to-school season is typically an indicator of holiday performance, this year’s sluggish August raises concerns about apparel retailers’ prospects for November and December.

The nine retailers tracked by Thomson Reuters reported 2.9% growth in August same-store sales. This compares with analysts’ expectations for 3.2% growth and with 6.5% growth a year earlier.

Many retailers, including the major department stores, have stopped reporting monthly results over the past year, making it more difficult to gauge the performance of the entire industry. (…)

But we have the weekly chain store sales from ICSC:

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U.S. Freight Volumes Increase in August

Shipments rose 1.7 percent from July, supporting the prediction that 2013 will have a peak holiday shipping season, even if it is little more than a bump in volume. Railroad traffic was very strong in August, with carload traffic up 6 percent and intermodal shipments up 6.5 percent. The American Trucking Association’s truck tonnage index fell in July, however the not seasonally adjusted index actually rose 3 percent (latest figures available). August shipments were still lower than in the same month in 2011 and 2012, but the gap has narrowed. On a cumulative basis the number of shipments has risen 5.1 percent since the beginning of the year.

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Emerging market output edges higher in August

The HSBC Emerging Markets Index (EMI), a monthly indicator derived from the PMI™ surveys, recovered from July‟s post-crisis low in August, but signalled only a marginal rise in output across global emerging markets. The EMI rose from 49.5 to 50.7, the third-lowest figure in over four years. That said, it was the first rise in the
headline figure since March.

Manufacturing output was flat in August, as a fractional rise in China was weighed down by declines in other Asian economies and Brazil. Growth of services activity remained weak.

imageOf the four largest emerging economies, China and Russia posted mild increases in output following declines in July. Brazil registered a further marginal drop in activity, while India posted the steepest rate of
decline since March 2009.

Growth of new business resumed following July‟s contraction. The rate of expansion was only marginal, however, with manufacturing new orders little-changed on the month.

Employment declined further in August. The manufacturing workforce shrank for the fourth month running, while service sector staffing declined for the first time in over four years, albeit marginally.

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MORE ON CANADIAN HOUSING

National Bank Financial has one of the best groups of economists on the sell side. Here’s another reason why:

The British magazine “The Economist” recently took another shot at the Canadian housing market. According to an article published for its August 31 issue “Canada’s house prices are bubbly whereas Japan’s are undeservedly flat”. This conclusion is based on a simple comparison of price-to-rent and price-to-income ratios.

In our view, a more thorough analysis of home prices sustainability must also take into account the level of mortgage rates as well as another crucial factor: demographics. As it turns out, Canada has one of the fastest population growth rates in the advanced economies for people
aged 20-44 – the cohort most likely to form households.

As today’s Hot Chart shows, the annual growth in Canada is currently running at 1.2% vs. a 0.3% decline for all advanced economies and a 1.2% drop in Japan.

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ECB Raises GDP Forecast

The ECB slightly upgraded its economic forecast and now expects a contraction in gross domestic product this year of just 0.4%. It shaved 0.1 percentage point from next year’s estimate and now expects GDP growth of 1%.

ECB economists expect inflation to average 1.3% next year, well below the bank’s 2% target, suggesting higher prices aren’t an impediment to additional economic stimulus.

German Exports Unexpectedly Dropped in July

Exports, adjusted for working days and seasonal changes, fell 1.1 percent from June, when they gained 0.6 percent, the Federal Statistics Office in Wiesbaden said today. Economists predicted an increase of 0.7 percent, according to the median forecast of 13 estimates in a Bloomberg News survey. Imports rose 0.5 percent.

Spain industrial output falls for 23rd month in July

Calendar-adjusted output fell 1.4 percent year-on-year in July, data from the National Statistics Institute showed on Friday after a drop of 2.2 percent in June, which was revised down from a preliminary reading for a 1.9 percent contraction.

Japan Government Upgrades Economic Assessment  After 14 long months of “worsening” and “standstills”, Japan’s government finally upgraded its overall economic view on Friday.

Japan’s Cabinet Office deemed July’s coincident composite index—consisting of 11 key economic indicators including industrial output and retail sales—to be “showing improvement” after it rose 0.9 points on month to 106.4, the highest since April 2012. The government defines improvement as being when the index shows “a high likelihood of an economic expansion.” (…)

The indicators that most contributed to the rise were manufacturing-related numbers, such as industrial output and industrial electricity usage, owing to hikes in semiconductor parts production.

According to a Cabinet Office official, even sectors that negatively impacted the coincident index—lagging retails sales—had more to do with bad weather, fewer calendar holidays and earlier-than-usual summer sales schedules rather than consumer mindset. Sales of luxury items such as expensive watches continued to perform well, the official said.

Reuters’s AlphaNow blog remains cautious: JAPAN AT RISK OF A 1997 RE-RUN?

(…) However, a closer look at the details unveils pockets of weakness in terms of the underlying trends—not only are deflationary pressures still brewing, but real wage growth turned negative in the twelve-months to July. This backdrop renders the upcoming decision—expected after the release of the Tankan survey in early October—on the introduction of a VAT increase in April even more contentious. In turn, the looming risk is that we witness a repeat of the mistake made by the Hashimoto administration in 1997. In our view, it is only following concrete signs of a pick-up in wage growth and private demand for credit that fiscal consolidation can be successfully enacted—something Mr Abe should not lose sight of.

Both headline and core—excluding fresh food—CPI measures posted an annual 0.7% increase in July, the highest in five years. However, after stripping out energy costs, CPI was a negative 0.1%. There are, of course, adverse consequences for real earnings, which fell 0.4% in the year to July. Were it not for a large increase in bonuses and overtime pay, the decline in real earnings would have been larger still. In conjunction with July’s declining real exports, these numbers suggest that not only has a weaker yen failed to contain—let alone reduce—Japan’s trade deficit, but it is also giving the economy the wrong kind of inflation. The balance Mr Abe has to strike, between pursuit of growth and fiscal discipline, is getting increasingly finer.

This situation is reminiscent of 1997, when the Hashimoto government proceeded with what proved to be premature fiscal consolidation. Back then, the decision to implement a combination of higher taxes and lower spending was predicated on the belief that the economy could ‘take it’, drawing confidence from a strong GDP report for the previous year. Ironically, we have a similar set of circumstances this time. (…)

Notwithstanding the fragile state of Japanese consumers’ purchasing power, it is predominantly government spending that is helping to sustain aggregate demand—Japan’s private sector is still saving at a rate equal to over 9% of GDP. Until there is clear evidence of growth in private demand for credit, which would act as an offset to fiscal consolidation, a tighter budget will more likely than not arrest Japan’s positive economic momentum.

Moreover, we are not at all convinced that the much-vaunted counterbalancing measures will stem the negative implications higher VAT has for domestic demand, at least in the short term. Any benefit from the introduction of corporate tax cuts and an accelerated depreciation scheme for business investment would be a long time coming, in contrast to the immediate impact of a tax on consumption. In addition, one lesson policymakers ought to have learned by now is that more QE is no direct substitute for fiscal retrenchment, particularly amid a balance sheet recession.

Mr Abe is between a rock and a hard place. Backing off on the VAT rise could be perceived as simply sending the wrong message to investors, both in terms of political credibility and commitment to fiscal discipline. But should a decision to proceed as planned backfire, this would constitute a heavy blow to Abenomics as a whole. A reversal of market sentiment on Japan could provide the catalyst for a broad selloff. The ‘honeymoon’ period for JGBs—which remain largely unaffected by Fed tapering talk—could be tested once again.

One policy option for the government might be to announce some additional targeted fiscal spending measures along with, and as an offset to, the tax increase. Mr Abe would do well to play it safe at this juncture—particularly as the sizes of Japan’s debt and deficit dwarfs those facing Mr Hashimoto in 1997.

Optimism grows for developed economies Government borrowing costs in the US and Europe surge

Treasury Yields Top 3%

Hours ahead of U.S. employment data that could seal the deal for the U.S. Federal Reserve to start pulling back on monetary stimulus this month, ten-year bond yields traded above 3% for the first time in over two years.

image(…) As Treasurys have tottered, yields on 10-year gilts have climbed to over two-year highs over 3%. The yield on the 10-year Bund has risen to 2.02%, the highest level since March 2012. The yield on 10-year Japanese government bonds climbed to a one-month-high Friday

An unwinding of monetary stimulus in the U.S. will also mean fewer dollars flowing into emerging markets. Jitters over Fed tapering have cast the market’s unfriendly gaze over countries with greater dependency on foreign money, such as Turkey and India. Bond markets from Brazil to South Africa have tumbled.

U.S. BANKS CAPITAL RATIOS BACK UP

As the industry’s capital ratios have greatly improved from pre-crisis levels, we expect that eventually the industry’s “beta” will fall due to capital strength, a stronger regulatory framework, and enhanced transparency afforded by processes such as the CCAR. (RBC Capital)

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MORE ON EQUITY VS COPPER CORRELATION

In my Sept. 3 New$ & View$, I disagreed with John Mauldin on the long-term correlation between copper and equity prices:

Something inside me screeched when I read “Unless the long-term correlation has disappeared”. John is younger than me so his “long term” must differ. Here’s my “long term” which does not correlate copper with equity prices very well (sorry, I do not have John’s means to quickly combine both series on the same chart but the time frames are the same).

I may be short on means but not on friends. Terry Orstland (TSO Research) graciously sent me copper prices back to 1970. Here’s the chart combining both series:

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TRAVELLING

Suzanne and I will be travelling in Europe for the next 3 weeks. Posting will continue as much as possible subject to our schedule. Switzerland, Germany, Holland, Belgium. Sounds like a beer tour! Mug

 
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